Thursday, March 29, 2007

by Doug PollackAs reported below by Reuters on March 28th, HP has sued Acer the number 4 worldwide PC manufacturer, for patent infringement. The HP lawsuit seeks unspecified monetary damages but requests the removal Acer products from US markets, where Acer had revenues last year of around $1.6 billion.

The patents in question are very narrow and technical in nature, and include a technology for improving power consumption known as processor "speed stepping". This technique is commonly used in many of today's laptop computers, not to mention in microprocessors. The patents in question were issued between 1997 and 2003.

It is interesting to see HP use their patent portfolio in this type of competitively aggressive manner, especially in the PC business. Their behavior reflects a growing and somewhat disturbing trend in the technology industry where large companies with rich IP portfolios will use a small number of highly technical patents to disrupt the market momentum of a successful and threatening competitor.

In recent memory we've seen similar disputes between Broadcom and Qualcomm the the cellphone market, and Verizon and Vonage in VOIP service. In each case, the aggressor will delve deeply into their IP portfolios to identify patents where a credible case, albeit belatedly, can be made for infringement by a key competitor with a mainstream market offering. The potential that the infringement may have been inadvertent or a result of broadly adopted techniques being irrelevant.

What is disturbing about this practice relates to timing. HP didn't make the effort to identify the specific patents in question and note their alleged infringement by Acer until after Acer designed the technology into dozens of their PCs and reached a US market size in annual revenues of $1.6 billion and growing. At this point, if the HP position was upheld and Acer was required to cease shipments of infringing PCs in the US, they could arguably lose $1 billion in revenues and by the time they re-engineered their entire product line may never regain their lost market momentum.

Now of course one can argue that the design engineers at Acer purposefully used technology that they knew was patented by HP. And because of this behavior, Acer's infringing products should be removed from the market. However, it is somewhat more believable that computer design engineers do not actively monitor the landscape of thousands of patents held by companies like HP, IBM, Sun and the like, to ensure they sidestep this minefield of competitor's patents.

Unless something substantial changes, companies will need to become more regimented and diligent about monitoring and analyzing their own and their competitors patent portfolios. And then find ways to provide guidance to their R&D teams to avoid potentially infringing designs. Until then, I suspect we'll be seeing more news on lawsuits such as this one from HP.

Goldman Sachs analyst Henry King said the lawsuit, which aims to stop Acer from selling some products in the United States, could pressure Acer's already-slim profit margins there.

"Acer has become a threat that leading PC vendors cannot afford to neglect," he said in a research note. "We understand why competitors would desire a halt to Acer's expansion in the U.S. market."

Shares in Acer which is due to report earnings later on Wednesday, were down 2 percent to T$63.00 at 0425 GMT on Wednesday, underforming the benchmark TAIEX index, which declined 0.92 percent, although MSCI's index of IT stocks, down 1.4 percent, indicated a broad sell-off in the sector.

The lawsuit, filed in a Texas federal court on Tuesday, seeks to stop Acer from selling some products in the United States, including desktop and notebook computers, and media centers and related products, because HP alleges they use its patented technology.

The five U.S. patents listed in the lawsuit were issued between 1997 and 2003.

HP, the world's top PC maker, said in a statement it "is taking necessary action to protect its intellectual property against unauthorized use" by Acer the world's No.4 PC maker.

The patents relate to optical data storage, circuits and methods for reducing computer system power consumption, multiple processors in computer systems, and an improved method for attaching devices to a digital serial bus, which allows communication between electronic systems.

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